Malta introduces Notional Interest Deduction (NID)
By virtue of a Legal Notice No 262 of 2017 (published on 5 October 2017) Malta introduced a Notional Interest Deduction (“NID”) mechanism. The NID is a new tax incentive, which aims to approximate neutrality between debt and equity financing.
NID is an innovative way for companies to reduce their tax liabilities. It allows companies to deduct a notional interest amount based on the ‘risk capital’ of a company. Such companies will be able to claim a deduction against their chargeable income for NID deemed to be incurred on their equity capital.
Main features of NID
- The NID will be optional for companies.
- Calculation: notional interest rate X balance of risk capital that the undertaking has at year end.
- Notional interest rate is defined as the ‘risk free rate’; the current yield to maturity of Malta Government stocks, with a remaining term of approximately 20 years, plus a 5% premium.
- Risk capital is defined as: share or partnership capital of a company or partnership, any share premium, positive retained earnings, interest free loans or other debt, any other reserves resulting from a contribution to the company or partnership and any other item which is shown as equity in the financial statements of the undertaking.
- An equivalent deduction is permitted to Maltese permanent establishment of a foreign company or partnership (resulting from a contribution to the Maltese permanent establishment).
- NID claimed in any one year cannot exceed 90% of the company’s taxable income (before grossing up for FRFTC). Any excess can be carried forward indefinitely, to be deducted against taxable income in future years. Remaining income is taxed at the standard rate of 35%.
- Where NID is claimed, the shareholder will be considered to receive the same amount of notional interest income, for Maltese tax purposes. If a shareholder is not resident in Malta, the deemed interest income will, however, be exempt from tax in Malta, providing that certain criteria are met.
- Specific anti-avoidance rules are included to prevent abusive application of the regime.
- Taxpayers will be able to claim NID on profits relating to the tax year 2017, as these profits are assessable for income tax in 2018.
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